Supply Chains in 2021 and What to Expect in 2022

The year 2020 presented the world with some incredible challenges, especially in the world of supply chain. Almost two years later, the COVID-19 pandemic and supply chain issues remain a major challenge for the entire globe. Now that 2021 has come to an end, we want to look back on what happened last year and talk about what we expect to see in 2022.

2021 Recap

There is a lot to cover when looking back at supply chain and logistics in 2021 but we want to focus on two major topics that cover many different areas.

Cost Increases

A huge theme of 2021 was the continued increases to all costs across supply chain and logistics. Within transportation, we saw parcel carriers continue to hike up rates, while LTL and Truckload rates also continued to rise. One of the main drivers to the higher rates is that the demand for shipping remains way above the current capacity that exists. Perhaps the most extreme case of this was seen within the ocean container shipping industry. The cost to ship an ocean container at the end of 2021 was 3-7 times more expensive than in 2020, depending on the route. In addition, the congestion seen at the ports is causing dwell times to escalate, resulting in more costs due to the incurred fees.

The transportation industry was not the only area within supply chain and logistics to see cost increases. We also saw 3PL prices and warehouse rates increase dramatically. Many of our clients saw 3PLs increase transactional costs by up to 30%. The cost of leasing and owning a warehouse also increased across the board, especially in areas like southern California. This reflects the demand for warehouses and 3PLs growing faster than the availability.

Throughout the year, labor shortages also became a major headline in all industries, especially in warehousing and manufacturing. To maintain a sufficient workforce, many companies were forced to increase wages, adding even more costs to the supply chain.

Investment in the Supply Chain

Many of the reasons for the cost increases discussed in the previous section were due to demand being greater than the supply. This caused people and companies to take action, as investment in the supply chain and logistics was another main theme that was seen in 2021 and that we expect to see continue going forward.

In years past, reducing supply chain costs was always the main focus for our clients during supply chain network optimization projects. This year, service level and transit time to customers was emphasized more and more, even if it meant higher costs. Two of the world’s largest companies, Walmart and Amazon are a perfect example of this. Walmart has credited some of their 2021 growth to an increased focus on their e-commerce business and omni-channel development. To increase their ability to fulfill orders quickly, Amazon opened nearly 300 facilities in 2020 and the 2021 number is expected to be large as well.

Companies are also looking at supply chain optimization as a more competitive tool, focusing on organizing supply chains globally and across all business units rather than each region/business operating independently. This will require some heavy investments up front in order to improve the business over the long term.

In addition to companies investing in their own supply chains, investment firms also have been investing in transportation and warehousing. This is a direct result of the high demand for transportation and warehousing outweighing the existing capacity. These investments should bring additional capacity to the market in the years to come.

Investments in sustainability also became a major focus in 2021, with numerous companies making pledges towards net zero emissions. Over 200 companies globally have joined The Climate Pledge, to have zero net emissions by 2040.

What to Expect in 2022

We expect many of the trends and challenges from 2021 to continue but ease a bit in 2022.

More Capacity for Freight and Warehousing

We expect to see a lot of new capacity entering the market in transportation and warehousing thanks to the investments seen in the supply chain industry in 2021. This should cause trucking rates and ocean rates to continue to plateau and eventually be reduced but rates are expected to remain elevated in 2022. We expect to see a very similar trend in the warehousing and 3PL market as the additional capacity coming onto the scene should level out the price increases and eventually cause costs to drop slightly. However, like transportation costs, we think prices will continue to be elevated.

Increased Compensation

We anticipate more companies offering better pay and benefits to compensate for the labor shortages and attract a more capable work force.

Continued Investment in the Supply Chain

With the huge demand for carriers, 3PLs and warehouse space, we expect to see continued investment in supply chain. We also expect companies to continue to focus on warehousing and building out their distribution networks to increase their service levels to their customers. Many companies, especially online retailers, saw rapid growth over the past year. This has made warehousing a top priority for a lot of companies as they are quickly outgrowing their current operations. Many companies will not be able to support their growth without optimization, automation, and expansion.

Continued Growth in 3PL Demand

With e-commerce producing so many new companies and altering the business models of existing companies, the need for warehousing space is at an all-time high. For many companies, it makes sense to outsource this to experts rather than try and build a warehouse operation internally, so we expect an even greater desire for 3PLs in 2022.

A Focus on Global Supply Chains

We expect companies to continue using fulfillment and logistics as a competitive tool; companies are going to start looking at all business units and supply chain functions together to leverage any opportunities to integrate, optimize and reduce costs. We also anticipate the growth of nearshoring and more local and diverse sourcing to continue. This become a topic of conversation in 2020 and we started to see this come into action in 2021 but restructuring of this size takes a long time so results will not be seen until we get a bit further down the road.

A Continued Shift Towards Sustainability

We also expect to see a continued focus on sustainability in 2022 and beyond as restructuring supply chains can have a massive impact on a company’s greenhouse gas emissions.

We at Establish wish everyone a safe and healthy 2022!

Digital Twin Technology - From Concept to Reality

Digital twins are the next step in the evolution of simulation technology. Early developments began in the 21st-century, starting from computer-driven simulations to the creation of AutoCAD and other simulation applications that have grown to current system design programs. Technology such as increased computing power and reliable sensors has made digital twins a real possibility.

What exactly are digital twins?

The digital twin is a solution to help bridge the physical and digital world. Digital twins take 3D modeling to the next level by capturing more than just static information and becoming a live e-model of the product. Sensors capture dynamic data that provides the accurate state of the product to better support areas such as prevention, troubleshooting, and quality management. It provides feasible and realistic simulations that will or could happen with a product. To put into simpler terms as defined by IBM, “The digital twin is the virtual representation of a physical object or system across its life-cycle. It uses real-time data and other sources to enable learning, reasoning, and dynamically recalibrating for improved decision making.”

The common key characteristics of a digital twin given by DHL are:

1.       A digital twin simulates both the physical state and behavior of the thing

2.       A digital twin is unique, associated with a single, specific instance of the thing

3.       A digital twin is connected to the thing, updating itself in response to known changes to the thing’s state, condition, or context

4.       A digital twin provides value through visualizations, analysis, prediction, or optimization

Effects in the Supply-Chain and Logistics Industry

Digital twins in the early stages were being used in high-value and high-criticality products such as aerospace and defense. Now, companies are starting to collect data for the use of digital twins outside of these industries. This can create a major influence in the product life cycle and manufacturing.

Product life cycle

·       Faster design iterations

·       Reduced development costs due to decrease in physical prototypes

·       Competitive advantage in fast-tracking a product into the market

·       Increased reliability of final product

Manufacturing:

·       Distinct specifications for suppliers, creating optimized shipping and manufacturing designs

·       Models with specific components and materials for all products

·       Conduct realistic simulations for layouts, processes, and material flow before facility is created

·       Troubleshoot product faults to help find root causes and optimize future performance

Challenges

The biggest challenge that digital twins face in the logistics industry is the quality of data. Current digital twins are not exact e-replicas of the product. This is because it is extremely expensive to collect and clean data such as the physical, chemical, electrical, and thermal state of a product. To bypass this, engineers are using assumptions and simplifying their models.

Collecting high-quality data can be expensive which poses the question if implementing digital twins are worth it. High-value and high-criticality industries will continue to expand digital twins, but we may not see adoption in the commercial industry in the near future.

Ensuring a Successful Supply Chain Network Optimization Study

We previously wrote about some of the reasons and incentives for why a company would want to execute a supply chain network optimization study. Now, we would like to discuss some of the key contributing factors to consider when completing the supply chain network optimization study that will ensure both realistic and usable results.

Modeling Tools

A supply chain network optimization study cannot be completed without using a supply chain modeling software tool. Modeling tools will be able to handle all the necessary data and backend calculations so that the user can focus on having the right inputs and interpreting the outputs. There are many different tools out there that will get the job done and each one has different pros and cons. Some of the main ones today include Supply Chain Guru, Blue Yonder and AIMMS, as well as our internal proprietary tool, ASSIGN.

Data

We talked about the multitude of data analysis that will be delivered during a supply chain network optimization study, but data will also be the major input that drives the model and strategy development. That being said, it is important to spend a large amount of the time up front focusing on the data. Collecting the right data and making sure the data is of reliable quality will determine how complex and detailed the study can get. The most important data to look at includes transportation/shipment data, sales order history data and inventory data. Getting all the supply chain cost elements (in particular, warehousing costs) will also be important for establishing the baseline costs. Because the data being used will be very granular, validating the data against financial reports is another extremely important step to ensure the data driving the project is correct and the project’s results, are therefore, realistic.

Business Rules & Constraints

While data is the most important factor during a supply chain network optimization study, the business rules and constraints should not be overlooked. This will be what restricts the model and ensures that the results are optimized to support the goals of the business. Business rules and constraints refer to parameters like a min or max inventory on hand and order fulfillment time (e.g. customers receive goods within 4 days) and should be discussed in the beginning of the project and updated as necessary. With the right software tool, these can be put right into the model.

Forecasting and Planning Factors

When reviewing the results of the supply chain network optimization study, it is important that they not only will work for the business as things are today but also will support the business over the next 5 years and beyond. That is why it is important to consider the demand forecast (as detailed or generic as it may be) and any planning factors. Planning factors are things that won’t be seen in the data, but should be considered, and can be anything from the opening/closing facility to tariff increases to needing a distribution center to be within a certain distance of a specific location. Ensuring that the forecast is properly understood, and all the planning factors are laid out early in the project, will be vital to feasibility of the results at the end of the project.

Considerations When Designing a Warehouse

Whether you are opening a new warehouse or distribution center, adding a product line, exploring automation, or just running out of space, there are many different considerations when optimizing a warehouse layout and associated processes. We wanted to share some insight regarding the Establish methodology for warehouse design projects, specifically the inputs we like to gather before any concepts are drawn or recommendations made.

First Steps – High Level Planning

The beginning of a warehouse design project should include a few conversations – those that define the scope of the project, success metrics, key stakeholders, and any headaches or concerns that should be solved by the new layout. It is important to lay everything out on the table, because the ‘optimal’ layout is not always the best suited to the operation and employees involved. Before beginning the project, it is paramount to understand company values, value propositions, goals, sales channels, customers, seasonality, and forecast. Additionally, involving all affected employees or group representatives and establishing rapport keeps everyone’s interests aligned.

Process & Material Flows

Following a high-level understanding of the business, the warehouse processes are of highest priority in determining warehouse layout. There is no better way to learn about process than physically being on the warehouse floor, walking through each decision point step-by-step. Shadowing, documenting, and talking with operators will be your greatest resources – no one knows the process better than those working it day-in and day-out. The time with operators develops buy-in for the future layout, ensuring that everyone’s needs and challenges are considered. While shadowing, it is important to remember to follow the entire lifecycle of a product through the warehouse, from the time it enters the premises through delivery into the customer’s hands. We’ve found that having a thorough understanding for the operation leads to better data analysis later in the project.

Data Analysis on Volumes

In addition to the qualitative observation of process, warehouse design should include a healthy amount of quantitative data analysis to determine product volumes and order profile as these are what dictate labor and spatial requirements. Order profile is the single most important piece of data for warehouse design, it is the driver for process and storage. Understanding how product is ordered, be it pallets/cases/eaches, will define what picking strategies you can deploy (think pick by order, batch, cluster, wave, or zone picking). Having a grasp on peak volumes, not just averages, assures the operation can withstand those high-volume days. Order profile, picking strategy, and volumes help determine inventory space necessary and labor hours involved.

Bringing it Together

The combination of process knowledge and data analysis as inputs for the design will allow for a better chance to land on a solution that is both optimal and meets the needs of the business. Once we’ve developed planning factors and worked through this qualitative and quantitative approach to the inputs, we can begin to iterate through concepts. Think of the observations and analysis we’ve done before as puzzle pieces – each piece (i.e. the amount of racking for a product, staging space, or machinery) is a defined amount of space. From here, we fit all those pieces together, draw material flows to follow the life cycle of the product, and visualize. After that, it’s all iteration.

What are the Benefits When Completing a Supply Chain Network Study?

It does not matter if a company is business-to-consumer (B2C), business-to-business (B2B) or direct-to-consumer (DTC), if the company distributes goods, then the supply chain will play a vital role. That being said, it is important for companies to be active when reviewing their supply chain network to ensure that it is set up optimally to support the business. We find that supply chain costs usually account for over 6-10% of sales, which can add up to a lot of money for large companies. Likewise, it is just as important for smaller companies to prioritize their supply chain strategy, as they may quickly and consistently outgrow or shift their current supply chain networks.

One of the best ways to review the current supply chain strategy and determine how it can be improved is by doing a supply chain network study (aka supply chain network design or supply chain network optimization), which consists of loading data into a supply chain modeling software to test out different scenarios against the current supply chain (baseline). There are a lot of benefits that can come from doing a supply chain network study and some are more obvious than others.

Data Analysis

Every supply chain network study starts with lots and lots of data. This data will be used in more than one way throughout the study. In addition to being what drives the model, there are loads of analysis that take place in the beginning portion to understand the business and see what sort of inventory and distribution strategies make sense. We find that most of the time our clients do not have the time or resources to complete detailed analysis on a consistent basis so usually a lot is learned before the network modelling even starts. This can pinpoint areas for the company to focus on outside of the supply chain network study and lead to the development of different supply chain strategies that were not thought of previously.

The Baseline

Creating a digital replica of the current supply chain network costs, known as the baseline, is another major portion of the supply chain network study. This will show the current nodes or locations involved in the supply chain and all of the supply chain related costs. This information will give a good indication of where the highest costs are and be the starting point for comparing alternatives. In addition to costs, the baseline will also give a look into the current service levels being achieved, a visual representation of ship patterns, and a look at volumes vs capacity to see what areas of the supply chain might be strained.

Center of Gravity

The center of gravity analysis uses demand data to determine the optimal location or locations for a specified number of DCs. It can be a quick and simple way to answer questions about location and number of locations and will help make decisions when determining what scenarios to run later in the study.

Scenario Comparison

The ability to compare different scenarios without making any physical changes is probably the most significant deliverable when doing a supply chain network study. Once the baseline is created, different distribution strategies and node locations can be modeled to see their impact on costs, service levels, ship patterns and volumes against the baseline. Most scenarios tested should be based on the data analysis that was done, but there is a lot of freedom. If you have ever wondered what would happen if you moved your operation across the country or sourced products from the one country instead of another, a network study can tell you what that would look like.

The Final Deliverables

Supply chain network studies generate a lot of deliverables. The results/answers will be based on what is important to the business. Some companies might prioritize 2-day shipping where others want to minimize costs and improve bottom line. Regardless of the main goal, the supply chain network study offers insight into a variety of considerations, such as sourcing, distribution and inventory strategy including number of distribution centers, distribution center location(s), ship patterns and what to store where. This information can help make key strategic decisions for the supply chain and the business as a whole.

Self-Driving Trucks - A New Age for Ground Shipping

Self-driving commercial trucks have been a hot topic for the past few years as several companies have joined this sector in an innovative movement to become the first to establish a fully disengaged trucking network. A fully disengaged trucking network would negate the need for the driver to interact with the vehicle, but still be available in case of emergencies. The development of this technology could lead to possible reduced labor costs and reduced transit times.

What are self-driving trucks?

Self-driving trucks or “robo-trucks” focuses on autonomous technology that does not require a human driver. The idea is like that of self-driving cars, but with constraints and considerations such as load weight and distance traveled. Though self-driving trucks and electric vehicles are commonly associated with one another, electric vehicles primarily focus on the renewable and sustainable energy mainly for the retail use. Though they are different, the two sectors have been developing almost in parallel.

Who are the major players and Where are we now?

A few major players in this area are Waymo, formally known as the Google self-driving car project, TuSimple, Gatik, and Embark. These companies have already began mapping out their trucking network and chances are you may have already seen them on the road. Waymo and GM Cruise have completed 11,017 and 5,205 miles respectively of disengaged travel.  TuSimple’s longest mapped route is 1,000 miles between Phoenix and Dallas. In fact, they have begun a four-year plan to go nationwide by 2021, traveling cross-country from Los Angeles to Jacksonville. They also intend to completely remove a person behind the wheel is 2021.

Various partnerships have been established such as Waymo with UPS and AutoNation and the start-up Gatik will begin delivering for Walmart in 2021. Embark, in collaboration with Amazon, has begun transportation of Frigidaire refrigerators from El Paso to Palms Spring. Though we are far from implementing self-driving trucks on a nationwide scale, these partnerships represent the commitment to this sector.

Impacts and Looking Ahead

As self-driving trucks start to become more common, there are areas in supply-chain and logistics that will be affected and need to be considered.

1.       Quality and Safety of goods

Who becomes responsible for the quality and safety of the goods? It could be placed upon the company to reformat their packaging strategy to be more secure or the freight forwarder to ensure that the transportation of goods is secured. The safety of the goods is a priority to consider which may impact the relationships and responsibilities between these entities.

2.       Adaption of transportation management systems

As self-driving trucks become integrated in the industry, managers need to consider what new types of data need to be collected to ensure that the transportation of goods is optimal. When trucks arrive at their destination, how is communication going to be accurately logged and confirmed that the goods were not only obtained, but that the trucks are also meeting regulations? Transportation management systems will need to adapt to this new mode of transit and be able to consider new elements that may arise.

3.       The career of truck drivers

A major discussion on the impact of self-driving is the career of truck drivers. With the male workforce dominating the trucking profession at over 90%, people wonder if it would make the career obsolete. Are these drivers expected to learn the new technology to keep up with the innovation? TuSimple has tried to proactively combat this possible problem by offering a program at Pima Community College to help truck drivers adapt to the new technology. On the other hand, self-driving trucks can be implemented as a driver assist technology (rather than driver replace) on long routes to reduce breaks required and travel time. For example, the 11-hour driving limit could be prolonged if the driver can rest while on route, reducing fatigue.

5 Supply Chain Trends for 2021

This past year has created many new challenges for everyone, causing consumers and companies to adapt. We expect some of the supply chain changes to be temporary but that many of them will have a lasting impact on the supply chain industry going forward. Below, we discuss some of the trends that we expect to see in 2021.

Fulfillment and Logistics as a Competitive Tool

Every year we continue to see consumer behavior change, and in no year has that change happened as rapidly as in 2020. People want to get quality goods for a reasonable price and quickly. Unorganized supply chains will become increasingly exposed as companies will have to choose between bad service levels or unsustainable costs to meet customer demand. The most obvious example of this trend is Amazon's move to achieve next-day or same-day shipping. As stated above, consumer expectations for service continue to rise. This means businesses that have systems in place to forecast well, stock optimal levels of inventory and fulfill efficiently have a significant advantage over those that do not.

Focusing on E-Commerce, Service Levels and Omnichannel Development

The shift from brick and mortar retail to e-commerce has been growing every year, and COVID-19 only expedited that growth even more. It's no surprise that consumer’s extreme shift to e-commerce seen in 2020 will have a lasting effect on the way people do business moving forward. In addition to the e-commerce shift, service levels are also becoming a higher focus as consumers are going to choose the quickest and most reliable option. To keep up with these shifts, companies are going to have to continue to focus on developing their omnichannel strategy. This means using support systems to create an interconnected network of stores, warehouses and 3PLs, providing the flexibility to fulfill both large wholesale purchases and small e-commerce orders. Companies can then leverage this interconnectivity within the network to optimize fulfillment strategy on an order level basis.

Shifting E-Commerce to a 3PL

Another industry trend we expect to see is a significant shift for e-commerce distribution towards third-party logistics companies (3PLs). The e-commerce industry, in comparison to brick and mortar stores, presents a complexity that is hard to tackle for smaller companies. 3PLs provide an option that will allow companies to set up much quicker than if they opened their own warehouse and allow them to avoid significant fixed costs, have access to an already established network and get specialized processes based on their needs.

Making Procurement a Focus

COVID-19 complications and global trade friction with China mixed with consumer’s increasing expectations for better service have signaled to the supply chain world that now may be the time to focus on procurement. By moving suppliers closer to home (near-shoring) and prioritizing the procurement process to make lead time and flexibility priorities, companies can improve their fulfillment times and overall supply chain. Developing a regional supply chain offers the better potential for mutually beneficial relationships and improves both time and proximity to market. This confidence in relationship management and product could challenge the prior approach of low-cost country sourcing.

Freight Normalization – A New Baselinne

COVID-19 has caused overwhelming increases to volume causing capacities to be tested and costs and rejection rates to skyrocket. As the freight companies profit on these higher rates, it can be expected that they will reinvest into capital expenditures, such as more trucks, increasing capacity to meet market demand and normalizing from the economic shifts of 2020.

 We wish everyone a safe and healthy 2021.

Supply Chain Network Optimization – How to Do it Right

The time is right to re-align your Supply Chain Strategy, for many reasons including:

• Logistics and fulfillment are the new storefronts and sales tools

• The explosion of direct-to-consumer business forces all companies to have an omnichannel strategy.

• The sourcing landscape is rapidly changing with more near-sourcing and risk minimizing.

• Sustainability awareness is increasingly unavoidable - and transportation is a big piece.

The traditional approach very often leads to more of an endless data crunch and, in best case, a mathematical answer that minimizes the theoretical logistics costs but does little to create an implementable supply chain strategy.

But you don’t do a network optimization to relive the linear programming classes from college and show your mathematical acumen. Well, some of us may. For the rest of you, here are some crucial hard-earned learning points from many network optimization projects:

1. Avoid Spending Time and Money Feeding the Monster with Data

Nobody has perfect data. A proper strategy for cleaning and curate the data will be one key to the success of the project.

The important thing is to know what data really matters and how to curate the imperfections into a usable dataset.  The most critical data for the outcome is the shipment data and it is often the hardest data to get. If you don’t have access to this data internally, the carriers do have it. They are not always keen on sharing it, but they are still the best source. The order data is usually readily available and can be used to recreate shipments though the dim/weight can complicate things. This is an area where data-enrichment from firms specializing on this can work and also item profiling to reduce the complexity to where it matters.

Most advanced models require much more data to run, but the impact of other data is less critical and can in many cases be handled with benchmarks to get a starting point and sensitivity analysis where you rerun the model with the critical datapoint varied until you find the breaking point where the recommendation changes. It is much easier to make a call when you see where it really matters and have clear choices.

2. The model will not give you a strategy. It will only tell you which alternative is mathematically the best.

Before you run the model; use the data that has been collected to profile your supply chain. This will enable you to evaluate relevant solutions.         

• Customer profiles and requirements: Delivering to the big retailers demands a different solution than direct to consumer deliveries. Two separate networks?

• Inventory profile: Certain products may have demand patterns very tilted geographically or being critical from a supply perspective. Slow-movers vs best sellers. Examples of facts that would determine the eligible alternative network structures to optimize such as Central DC, Regional DCs, Satellites, Forward Stocking Locations, etc.

• Order profile, supply profile, product profile are other examples of facts that are important to analyze pre-modelling.

3. Sensitivity Analysis

Instead of trying to create the perfect dataset. Use the model to find out with what value on critical but uncertain data that the recommendation changes. This saves a lot of time and makes the decisions relevant.

4. Use the Right Software Tool for your Challenge

The most advanced optimization tools are expensive and require a lot of effort to configure. You’ve spent a lot of time and money before you are ready to run the model. This is totally worth the investment if your supply chain is very complex and you intend to, once configured, use the model frequently. Those software tools are sophisticated and awesome with all their possible add-ons.

Most companies have a more straightforward supply chain or can optimize the network in North America, or Europe, Asia, etc. separately and then piece them together. If this is the case, the most complex tools are complicating things without the added value. Spend the time and money you save on an adequate optimizing tool to focus on strategy development instead.